Finance Flashcards
Name 6 short term sources of finance
Retained profits
Government grant
Sale of asset
Bank overdraft
Trade credit
Factoring
Describe sale of asset
Business sells peive of equipment
Describe a government grant
Lump sum of money firm receives from government, doesn’t need repayed
Firm can acheveive thus by meeting a requirement like locating in an area of high unemployment
Describe bank overdraft
When a bank allows the firm to exceed the funds in their account, intrest is still paid
Describe trade credit
Supplier will deliver supplies to firm and allow them to pay at a later date
Describe factoring
Firm will collect all outstanding debts and sell them onto another firm (for a lower price than would receive getting debts themselves but saves time)
Name 3 medium term sources of finance
Bank loan
HP
LEASING
Describe hire purchase
Firm will higher equipment and pay in instalments after last instalment firm takes ownership of equipment
Describe leasing
Firm rents a building or equipment for an agreed period of time
Describe bank loan
Bank provides firm with a lump sum of cash that is paid back in instalments with intrest
Name 4 long term sources of finance
Mortgage
Crowd funding
Venture capatilist
Debenture
Describe a mortgage
Loan given to firms to purchase a premises repaid in instalments with intrest
Describe crowd funding
Where firm will find a project by raising money from a large amount of people who contribute a small amount each
Describe a vaneture capatilist
Private investors that provide finance where banks deem the investment too risky (dragons den)
Positive and negative of sale of asset
No intrest to be payed
No longer have equipment
Positive and negative of grant
Doesn’t need repayed
Often have to meet requirements to get one
Positive and 2negative of overdraft
Helps firm deal with cash flow when balance is 0
Bank can withdraw facility at any time
Can work out more expensive than a loan due to high intrest rates
2 Positive and negative of trade credit
Goods can pay for repayment for supplier
Helps with cash flow as don’t pay upfront
Normally miss out on a discount due to not paying upfront
Positive and 2 negative of HP
Receive items up front while making instalments
Normally works out more expensive than buying outright
Don’t own item till last payment
Positive and 2negative of leasing
Equipment can easily be changed if it becomes obsolete which means doesn’t take up finance
Firm never owns equipment
If loaned for a long time could work out more expensive than buying outright
Positive and 2negative of bank loan
Firm receives lump sum up front and can spread repayments
Intrest charged which means paying back more than borrowed
Small firms normally charged more intrest
Positive and negative of mortgage
Same as bank loan but you own property
If firm doesn’t keep on top of payment of instalments then bank can retake ownership of property which means firm may loose premises
Positive and 2negative of share issue
Allows firm to raise large very large amount of finance that doesn’t need paid back
Dilutes values of existing shares
Process of releasing shares is expensive
Positive and 2 negative of venture capatilist
Provide expertise aswell as finance
Normally charge high intrest rates for loan
Want part ownership in return also
2 Positive and 2 negative ofdebenture
Allows firm to raise very large sums of money
Intrest spread over long time
Even if firm makes a loss repayments must be made
Debenture holders have right to sell business assets in order for loan to be repayed
What is a cash budget
Forecast of all cash going in and out of a firm over a period of time ( normally a year)
Name 5 potential cash budget problems
Low sales which has lowered anount of money coming into business
Owner taking too many personal drawings
Too much money tied up in stock
Firm not chasing in unpaid bills
Borrowed a loan at too high of an intrest rate
7 solutions for a poor cash budget solutions
Organise a source of finance
Negoatiate better discounts with suppliers
Lease/HP equipment instead of buying, spreads repayments
Extended credit period with supplier which means firm has more time to repay debts
Chase in oursdiandung bills
Shorten time between buying and selling goods
Offer discounts to increase sales
5 reasons for a cash budget
Allows firm to spot when they have surplus cash and are able to purchase stuff
Control the business, eg overdraft being arranged to cover area of low cash
Useful to take to appeal for a bank loan
Allows firm to set targets for managers and departments
Provides a tool for firm to compare budgeted with actual performance
How to calculate PFTY
GP - expenses
Profit =
Sales - costs
GP =
Sales - cost of sales
What is cost of sales
Cost of purchases firm has made over previous trading year
What does income statement calculate
GP
PFTY
What is opening stock
Stock firm has at start of finnancial year( ie when a firm opens on first of January the stock it already has on its shelves)
What is purchases
Raw materials and products firm buys to make the finished goods
What is closing stock
The stock ‘on the shelves’ when a firm finishes a finishes a financial year.bwhich is carried over to next year
Cost of sales =
Opening stock + purchases - closing stock
GP=
Sales - cost of goods sold
Income statement and cash budget examples
Look at booklet
6 Expenses examples
Lighting, electrical, rent, advertising costs, delivery costs, repayments of loans ( overheads)
PFTY =
GP - expenses
Examples of how to cut expenses
Bulk buying
Lease equipment
Firm can be more energy efficient (turn off lights)
Ban personal staff phone calls on company phone
Change energy supplier for better deal
Ban overtime to reduce wage bill
8 Purpose of income statement
Calculate GP
calculate cost of sales
Shows net sales
Calculates total cost of expenses
Calculate PFTY
shows other incomes
AIDS decision making eg what expense to cut
Calculate tax that needs payed
To compare with previous years
What does a statement of financial position do
Shows value of business at particular point in time
Non current assets
Items a firm owns and will keep for more than a year
Current assets
Items firm owns and will keep for less than a year
Current liabilities
Items firm owes and will pay for in short term
Working equity
Shows difference between CA and CL
Shows funds available after short term debts met
PFTY description
Profit made after all business expenses
Balance sheet/ statement of financial position example
Look at booklet
What are the 3 types of ratios
Probability
Liquidity
Efficiency
What is a probability ratio
Looks at sales or expenses in relation to profits
What is a liquidity ratio
Shows ability off firm to pay off its short term debts
What is an efficiency ratio
Ratios used to measure efficiency which certain resources have been used within business
Name 3 probability ratios
GP %
PFTY %
ROEE
How to calculate GP%
GP/net sales x 100= %
What does GP% do
Calculate the % of every 1 pound that goes towards GP
How can a firm improve GP%
Increase selling price
Find cheaper suppliers
Negotiate discounts from supplier
Reduce theft or wast
How to calculate PFTY %
PFTY/NET SALES x 100=%
What does thebPFTY % do
Measures the % of every 1pound that goes towards PFTY
How to improve PFTY%
Improve GP
identify expenses that can be reduced
What is ROEE
Measures return on the capital invested in business by owner
How to calculate ROEE
PFTY/opening capital x 100 =%
How to improve ROEE
Increase sales and GP
Decrease expenses
Name the 2 liquidity ratios
Current ratio
Acid test ratio
Current ratio =
CA/CL
What does a current ratio do
Shows ability of a business to pay its short term debts
To improve a current ratio
Increase CA
decrease CL
Acid test ratio =
CAS-Stock/ CL
What does acid test ratio show
Ability or firm to pay short term debts inna crisis situation
Name the efficiency ratio
ROTI- rate of inventory turnover
How to calculate ROTI
Cost of sales / average stock held
Average stock =
Closing stock + opening stock / 2
3 To improve ROTI
Offer promotions
Advertise
Eisner stock levels match demand
4 Use of ratio analysis
Compare current performance with previous years
Compare against competitors
Hughlights part of business that needs attention (eg expenses too high)
AIDS decision making (eg firm will know when to take out a loan)
3 Limitations of ratio analysis
Comparions must be similar (size and industry)
Findings don’t take in external PESTEC factirslile a recessionthay would impact sales
Findings don’t take in internal factors like low staff morale
Name 4 people and why they use finnancial statements
Employees - ensure being paid fair
Managers - use it to measure performance
Owners/ shareholders - aid decisions at an AGM
Suppliers - asses firms ability to pay off debts
Name 3 types of technology to be used in finance department
Spreadsheet - performs calculations rapidly and accurately that no human could do
-spreadsheets can make graphs so department can spot trends
Databases- firm can use these electronically filling systems to record proves and cost of supplies
Pay pal- allows customers to pay online which makes more sales and helps control cash flow
